Bank of Canada hikes rates, takes dovish tone amid…

Pete Saunders |Thursday, January 18, 2018

Bank of Canada hikes rates, takes dovish tone amid…

Royal Bank of Canada and BMO Bank of Montreal were first among Canada's banks to respond to the rate hike, raising their prime lending rate by a quarter of a percentage point, to 3.45 per cent, effective Thursday.

The loonie rebounded from its earlier losses following the Bank of Canada's dovish interest rate hike announcement Wednesday, as Wall Street soared to new highs. However, it cautions about the substantial improbability linked to the possible changes of policy by the U.S., which is its major dealing partner.

For 2018, the central bank put Canada's GDP growth at 2.2 percent, slowing to 1.6 percent in 2019 - a slower pace than the estimated 3.0 percent growth expected for 2017. A hike this week would make it harder for most borrowers to qualify for a new mortgage.

The promise by Trump to have the policy amended together with his patriot vow which would cost export and Canadian investment.

The bank said that trade uncertainty is expected to cut investment by about 2 percent by the end of 2019, while US tax reforms will trim another 0.5 percent as firms may decide to redirect spending from Canada to the United States to benefit from lower corporate taxes. However, two strong reports - the December jobs data and the bank's business outlook survey - led many experts to change their calls.

While more rate hikes are probably warranted, some continued monetary policy accommodation will likely be needed to maintain optimal growth and inflation, the bank said, signaling it will not rush to return rates to more normal levels after they were slashed to historic lows in the wake of the financial crisis. By making NAFTA risks so prominent in this Statement, rate hike odds will now ebb and flow with the negotiations, even moreso than earlier. It predicted Canada's high levels of household debt would amplify the effects of higher interest rates on consumption.

The central bank estimates the economy grew 3% past year, and is expected to expand 2.2% in 2018.

The BoC added that it will remain "cautious" in the future and will rely heavily on "incoming data in assessing the economy's sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation".

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